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Countertrade Offers an Attractive Option When Selling Into LDCs
 

IOMA

From the May 1999 edition of Managing International Credit and Collections

When looking to sell into a lesser-developed country (LDC), international credit managers often find their professional skills tested to the limit. For many of the companies you have to deal with, there is often no way the customer can meet the credit standards. To make matters worse, there are often additional foreign exchange issues. But this does not mean that the sale cannot be made. Few realize it, but countertrade is an often-workable solution. In fact, it is also used in semi-industrialized countries and when selling into central and eastern European countries. Yet little is known about this long-standing practice.

What Is Countertrade?

Countertrade is a resourceful way to arrange for the sale of a product from an exporter to a company in a country that does not have the resources to pay for it in hard currency. The problem is usually with the importer but may be with the country's limited reserves as well. An international credit executive who arms his salespeople with an innovative countertrade solution gives the sales force a competitive advantage. In some cases, the company that cannot come up with a countertrade initiative will not be able to sell in certain markets.

The most well-known form of countertrade is barter-the simultaneous exchange of goods. Countertrade experts say it is also the form least Used.

Counterpurchase

Conversely, counterpurchase is the most common. This involves two parties, one of whom has goods that somebody in the LDC wants and the other of whom wishes to purchase something, usually a commodity, from somebody in the LDC. Payment never enters the LDC in its simplest form. The currency passes between the two other parties. More likely, a bank will be involved, slightly complicating the transaction.

Here's a simple example of a counterpurchase transaction. An LDC with a good supply of a commodity, such as soybeans, needs some personal computers. If a computer manufacturer needed some soybeans, the two could exchange the goods.

However, not many computer manufacturers use soybeans. On the other hand, a company involved in the production of food products might-but here the food company is not looking for computers. So, the computer manufacturer ships the computers to the LDC, which in turn ships the soybeans to the food company. The food company then pays the computer manufacturer.

Occasionally, there are circumstances when the goods are not as disparate as personal computers and soybeans, and a barter can be made. However, arranging a perfect match can be difficult.

Buy-Back

Those selling capital equipment or technology sometimes accept partial payment in the form of the goods manufactured with their equipment. This is known as compensation or buy-back. In these arrangements the supplier of the equipment gets some currency in addition to the goods.

In a buyback transaction, a producer of steel might send its goods to a foreign company, which would use the steel to manufacture a product, such as shelving. The steel producer would then buy back the shelves at a reduced price, in effect partially paying the manufacturer with the raw steel.

Offset

When two industrialized countries are involved in high-value contracts, such as aircraft or other defense items, offset is sometimes used. These arrangements tend to be reciprocal. As part of a high-dollar purchase agreement, say a $100 million worth of airplanes, the seller agrees to purchase $100 million of computer equipment from the buyer's country.

Bilateral

Bilateral trading agreements between two governments are also considered countertrade. Bilaterals are used most frequently when the countries involved have centrally planned or controlled economies along with foreign exchange shortages. This assures a market for the goods of the controlled economy, which tend to be raw materials or farm products. The bilateral assures the producer of a market for its goods and can be either a formal arrangement or simply an agreement to "develop mutual trade."

Finding a counterparty for these transactions is not simple. Large commodity traders, banks, and independent agents arrange countertrade transactions.

If your company has a product for countertrade, don't overlook the newest resource to help international credit professionals-the Internet. There's a wealth of information and leads out there and with a little bit of digging, the international credit manager will be able to provide the sales department with the leads they need to get started.

Costs and Risks

On top of the typical costs associated with any type of international trade, there are the fees charged by the party who arranged the countertrade. Given the complex nature of these transactions, consideration should be given to the additional risks associated with these contracts. Delivery and performance, always a consideration, take on new layers of concern when timing differences occur.

The interdependency of two or more trades greatly increases contract risk. Many experts recommend writing separate commercial contracts for each leg rather than having one master countertrade contract for the entire transaction. The separate contracts can then be linked by countertrade documentation.

Documentation

Never assume that the other party will perform in a certain way when entering a countertrade arrangement. The documentation, typically prepared by the party arranging the transaction, should:

  • connect all parties together;
  • state the purpose of the trade;
  • state the responsibilities of the participants; and
  • summarize how the transaction will run.

The documentation should include:

  • the terms of the underlying contract(s);
  • the requirements of each party;
  • any local regulations that affect the trade;
  • timing;
  • any financing requirements; and
  • how the arranger will receive its fee.

Government Policy

The U.S. government does not prohibit countertrade. The official position of the Commerce Department is that "the U.S. Government views countertrade as generally contrary to an open, free trading system but will not oppose participation by U.S. businesses in countertrade transactions unless such activity could have a negative impact on national security. All normal import and export regulations must be observed, as there are no special exemptions for countertrade. transactions." In spite of this position, the Department of Commerce offers advisory assistance as part of the export support programs used by many subscribers of this newsletter.

Additional Information

International credit professionals who want to learn more about countertrade have a number of options at their disposal.

For starters they can visit the Web sites included in the box below. The U.S. Department of Commerce has a useful publication, International Countertrade-A Guide for Managers and Executives, produced in conjunction with I-Trade.Commerce Exchange International's The World of Countertrade and the American Countertrade Association's Countertrade Term Definitions will both prove useful.

In those situations where even extended terms won't get you the sale, consider a countertrade alternative.

Useful Countertrade Web Sites:

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